What should the terms of the no shop be?

December 9, 2007

Venture funds often include a binding no shop, or exclusivity, provision in a term sheet. Below is a typical term sheet provision.

[Exclusive negotiations: From the date of the execution of this Memorandum of Terms until the earlier of (i) [__________], (ii) notice of termination of negotiations by the lead investor(s) and (iii) the initial closing of the financing contemplated by this Memorandum of Terms, neither the Company nor any of its directors, officers, employees or agents will solicit, or participate in negotiations or discussions with respect to, any other investment in, or acquisition of, the Company without the prior consent of the lead investor(s). [The lead investor(s) consent to the Company soliciting, and participating in negotiations and discussions with, [__________].]

Whether a no shop is included in the term sheet and the time period of the no shop are subject to negotiation. Venture funds may insist on a no-shop of 45 to 60 days in order to complete due diligence and legal documentation for the financing. The rationale for the no shop is that the fund does not want to expend the time and resources on additional due diligence and legal fees if the company will continue “shopping” the deal. If companies are unsuccessful at removing the no shop from the term sheet, they may try to limit the time period to 30 days or less. In my experience, most venture financings seem to take more than three weeks from term sheet signing to closing.

Companies may want to negotiate carve outs from the term sheet to allow for discussions with existing investors, banks, and specific other co-investors.